A new take on rent-versus-buy debate

Real estate website Zillow has a provocative data point for every renter thinking about buying these days: That move pays off after just three years on average nationwide.

The company, which lists for-sale and for-rent information on its site, has released a new analysis of what it calls the "break-even horizon," comparing what it would cost to buy or rent the same home in several markets over time.

The rent-or-buy calculus varies widely depending on where you live.

In the combined Los Angeles and Orange counties, for example, the magic number is 4.3 years, assuming the buyer has made a 20 percent down payment. Buying wins out after only 1.6 years in the desert community of Banning, Calif. But Newport Beach, Calif., residents must wait 14 years for buying to make more financial sense than renting.

The analysis takes into account a host of factors potential buyers should think about when considering the leap, including the down payment, mortgage and rental payments, buying and selling costs, property taxes, utilities, maintenance costs and tax deductions. The analysis adjusts for inflation and forecasts home value and rental price appreciation.

Zillow senior economist Svenja Gudell said the data should help homeowners get a rough and immediate sense of whether buying makes sense in a particular area in relation to their financial situation.

"For a homebuyer out there, it is really tough to get a good grip on the buy-versus-rent decision," Gudell said. Although buying a home is a deeply personal decision, she said, the analysis gives consumers "a sense for, 'Am I ready to make this decision?'"

The new take on the classic rent-versus-buy debate comes at a tenuous moment for the housing market. Many analysts believe that a housing bottom has been reached but don't expect a return to the heady days of the real estate bubble. There is already some concern about the strength of the recovery, with home sales slowing in June as inventory remained tight and buyers paid higher prices.

At the same time, rents are rising, housing affordability is at record levels and mortgage interest rates remain very low. These factors are prompting many renters to consider homeownership.

Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California at Los Angeles, noted that the main lesson from the subprime mortgage debacle and the housing bust was that homeownership shouldn't be pushed at all costs. Federal policy has been adjusted to support this new point of view.

"One of the things we have learned in recent years is, obviously, house prices don't always go up, and even over the very long term in certain markets, homeownership may only offer a minimal return," Gabriel said.

"What we have all learned is to treat homeownership as a bit of a dangerous animal. You know it's not always good, and it's not good for everyone."

Things to consider when buying, particularly in a slowly appreciating market, include how mobile you will be, your financial situation, marital status, career goals and personality, Gabriel said.

Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, added that in many regions buying has become increasingly attractive compared with renting. There are also nonfinancial reasons for buying.

"I can enjoy living in this house for the rest of my life, and nobody can throw me out of it," he said. "You are consuming something, and you have control over it, and control has some value."